Entrepreneurship and Hayekian Discovery

Brink Lindsey points me to this great article on how entrepreneurs think. It turns out that many entrepreneurs hate the concept of market research. Rather than trying to predict the overall size of the market in advance, their approach is to build a product that’s useful to a few customers, and then rapidly improve the product based on feedback from the initial customers. Brink’s take on this is spot-on:

Entrepreneurs grasp intuitively the central insight of the great economist F. A. Hayek: that capitalism is a process of discovery. Hayek saw that socialist central planning, then at the height of intellectual fashion, was doomed to founder on the unpredictability of the future. Capitalism, at the time derided for its chaotic duplicativeness, worked precisely because of its messiness: its decentralized process of trial-and-error experimentation is the only viable response to the ineradicable uncertainties of economic life.

Entrpreneurs are Hayekians at the micro level. They don’t want to sit back and plan, they want to dive in and discover and learn. They want to experiment: to see what works and what doesn’t, to build on the successes and leave the failures behind. Which is exactly what how the larger market order works at the macro level.

None of this is to say that planning is unnecessary. On the contrary, it’s vital — after you’ve discovered a good idea. To take that idea to scale and execute it efficiently — in other words, to pump out those Swedish meatballs — you need planning and lots of it. Which is why successful start-ups turn into big corporations run by professional managers.

Quite so. The distinction between entrepreneurs and managers and crucial, and it’s often overlooked. The skills needed to create a profitable 10-person company from scratch are very different from the skills needed to keep an existing 10,000-person company running smoothly. There are some people, like Bill Gates, who are good at both. But once the founder leaves, the people who take over for him tend to be cut from different cloth. They tend to be managers who earned MBAs and worked their way to the top of existing corporate hierarchies. They tend to be more process-oriented and risk-averse. I bet Brink’s description fits 22-year-old Bill Gates, but it probably doesn’t describe Tim Cook or Carly Fiorina.

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3 Responses to Entrepreneurship and Hayekian Discovery

  1. sam says:

    “I bet Brink‚Äôs description fits 22-year-old Bill Gates”

    The 22-year-old part is the key. There’s no planning because, well, 22-year-olds generally don’t plan, they just do. I don’t think there’s any grasping of an insight into the genius of capitalism. They might exhibit the truth of the insight, but I wouldn’t credit them with any deep reflection on the truth of it. 22-year-olds consider themselves immortal — they have time to fail, all the time in the world. 22-year-olds will rush in where 45-year-olds fear to tread. Goes with the territory.

  2. Helen says:

    I would suggest that the readers of this blog actually read “The Road to Serfdom” by Hayek. This is the book that he won the Nobel Prize for. He did not win that prize for saying that capitalism is a process of discovery.

    By the way, the copy that I got from the library had not been checked out in more than ten years, and at that time the book was out of print.

    Read it. Hayek takes 19th century liberalism and updates it for the 20th century while explaining how to stop people from becoming Nazis.

  3. Kaleberg says:

    It might not describe Tim Cook, but it does describe Steve Jobs. New Apple products on his watch tend to offer a bare minimum capability, sort of the least salable unit. Apple doesn’t provide a road map beyond an implicit statement that the products will be “improved” in the future. Once they see how the product is used, they prioritize and extend it. Needless to say, they get a lot of flack for this, but they also get a lot of sales.

    (This pattern goes back to the Apple II – no lower case, no color; the Mac – 256KB, 1 floppy drive; the iPod – music only, rip your own CDs; the MacBook Air – no DVD drive, 1 USB connector; the iPhone – no cut and paste, no push; the iPad – no printing, no camera. You can think of the original Apple TV as a hook on a line in the water, waiting to see how people use it, and the latest Apple TV as one response.)

    Capitalism might be a process of discovery, but all too often it doesn’t discover very nice things. I’ll bet Hayek is worth reading, and his popularizers have totally missed his point. I waded through some Nietzche a while back and ran into the same thing, a big glowing WTF?

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